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Oil tumbles $2 on Eurozone woes

Oil prices tumbled more than $2 a barrel on Thursday as the European debt crisis threatened to hit France and Spain, while Italy's borrowing costs remained at unsustainable levels.

Fears about the survival of the eurozone and an era of austerity multiplied after a 10 year bond sale by Spain and France left both countries with markedly higher borrowing costs.

Madrid was forced to pay the highest borrowing costs since 1997, sending the euro lower, while Paris fared only slightly better.

"People are spooked by the Spanish bond yield and the crisis seems to be escalating, pushing most markets lower," said Simon Wardell, an oil analyst at Global Insight.

Brent crude was down $2.35 at $109.53 a barrel at 1250 GMT, paring losses of over $3 a barrel earlier in the session.

U.S. crude was $1.60 cents lower at $100.99 a barrel, having recovered almost a $1 from its intraday low.

Italy's new prime minister Mario Monti contributed to the bleak outlook on Thursday stating Italy faced a serious crisis and he could not imagine the European Union surviving if the euro zone collapsed.

Monti's comments helped send oil prices to fresh intraday lows. A confidence vote on his freshly formed government is planned for 1930 GMT.

DIVERGENCE

U.S. oil markets continued to outperform Brent on Thursday, after news of a critical pipeline reversal in the Midwest wiped several dollars from the spread between the two types of crude a day earlier.

The spread between U.S. crude oil and Brent narrowed to less than $8 a barrel, touching a high of $7.88 a barrel during the early hours of trade.

The differential has plummeted from a record $28 a barrel in October, after rarely moving above a few dollars in previous years.

U.S. prices have soared on a run of positive economic data and plans to reverse a pipeline to ease a U.S. oil glut. "The concern is about austerity measures throughout Europe, with the follow-through for Brent being a drop in demand," said David Morrison, market strategist at GFT Global.

"Instead the prevailing view is that the U.S. will escape the difficulties in Europe and the rest of the world, which is ludicrous," he added.

On Wednesday, data showed industrial output in the world's biggest economy had rebounded strongly, while October consumer prices fell for the first time in four months, adding to the recent series of positive numbers.

HOPE

As worries about the euro zone escalated on Thursday hopes persisted across the Atlantic for further signs of growth, with attention pinned on monthly factory activity data due to be published at 1500 GMT.

The forward looking new orders index jumped to a six-month high in October, and is expected to continue to point to an economic expansion in the U.S. for November.

U.S. jobless data due at 1330 GMT will also provide clues as to the outlook for the world's no. 1 oil consumer.

The strength of the U.S. benchmark may pare the price difference with the European benchmark Brent to about $5 in 2012, Barclay's Capital analysts said in a note.

"In our view, WTI should not have traded at a severe discount to Brent or any other benchmark for most parts of this year in any case," Barclays Capital analysts led by Paul Horsnell and Amrita Sen said in a report.

A slide in crude oil inventories in the United States also supported prices, with stockpiles falling 1.1 million barrels as forecast, reflecting increased refinery utilisation rates.

Distillate supplies, which include heating oil and diesel fuel, dropped for the seventh consecutive week.